European board directors fall behind Canadian, and even U.S. peers, on many practices

Corporate governance in Canada – and to a lesser degree in the United States – is seen as being superior on many fronts to that in Europe, based on an INSEAD survey and related study.

A study by the INSEAD Corporate Governance Initiative showed that European board directors “lag behind both their Canadian and US counterparts in governance practices,” according to a an article from Timothy Rowley, a visiting professor of Strategy at INSEAD, and Ludo Van der Heyden, who is academic director of the INSEAD Corporate Governance Initiative.

In addition, the survey of board directors in Europe showed “startling shortcomings that could be undermining their effectiveness,” the two professors said.

European directors have less understanding of the industry in which the company works, act more like managers than board members and spend insufficient time on director’s duties, the article adds.

“Canada provides the world with high quality governance practices that result from a joint effort by an enlightened and effective corporate and public sphere (encompassing government ministries and regulators),” the study said. “Canada, a federal country that is also increasingly multi-cultural, has been reviewing and perfecting its governance practices. For these reasons, we believe the Canadian benchmark is a relevant one for a multi-cultural Europe whose own governance is far from optimal.”

Specifically, Canada comes out on top when comparing ISS governance rankings, with the United States in second place. Canadian directors also seem to have more expertise on their own industry when first appointed to the board.

Also, Canadian boards place more than three times the importance on executive sessions than European boards. Executive sessions allow for private discussions of select matters.

On the other hand, there is more gender diversity on European boards than in Canada. In Canada, many boards have at least one female director, while in Europe more boards have several female directors. Both regions could stand to improve more in this area.

Also, when it comes to director nominations, two-thirds of director nominations in European companies are achieved by directors’ personal contacts rather than through management recommendations or the use of search firms.

One-fifth of European directors said their companies have formal board and director assessments, as well.

There is clearly room for improvement at European boards.

“European directors have shown room to grow and commit to the role,” the article said. “They recognize their shortcomings and have shown a willingness to learn. They see the value in formalized processes but for the moment do not appear to put these words into action.”